2013 (8) TMI 627 - AT - Income Tax

Deduction of consultancy fees - contract work for film production - A.O. made disallowance - CIT deleted disallowance - Held that - although the assessee was engaged in the business of trading in investment and securities and the contracts for film production were executed by it for the first time during the year under consideration, there was complete unity of control and management - if there is common management and common control of the business, the new line of business constitutes expansion of the existing business - business relating to film production was set up in the year under consideration and the expenditure in question on payment of consultancy fees having incurred by the assessee in connection with the said business, the same was allowable as deduction even though the execution of the contract work for film production was not commenced during the year under consideration - Following decision of B.R. Ltd. vs. CIT 1978 (5) TMI 3 - SUPREME Court - Decided against Revenue. Applicability of Rule 9-A - Expenditure on production of feature films - Whether the assessee is in the business of production of feature films as contemplated in Rule 9A - Held that - It is manifest from the relevant portion of the agreement between the assessee company and M/s Sahara India TV Network that the role of the assessee company as production house was limited to produce the films at the instance of the producer Sahara India TV Network strictly in accordance with the concept, theme, script, production value and production schedule etc. approved by the producer. Even any alteration in the approved details was to be done with the prior written consent of the producer - The activity of production of film was to be monitored and supervised by M/s Sahara India TV Network as producer and the instructions and advice given by M/s Sahara India TV Network to the assessee, be it commercial and otherwise, was binding on the assessee as the production house. M/s Sahara India TV Network as the producer was entitled to use , exhibit, market, sell, distribute, re-produce, assign and exploit etc. the films and parts thereof as may be decided by it being perpetual and global territory holders of the films and the assessee production house was not entitled to any rights, interests and claims whatsoever except the gross consideration expressly provided in the agreement - all these terms and conditions of the agreement are sufficient to show that M/s Sahara India TV Network was the producer of the film as envisaged in Rule 9A and not the assessee and the said Rule therefore was not applicable in computing the business income of the assessee - Decided against Revenue.

Summary

Issues Involved:
1. Allowability of consultancy fees as a business expenditure.
2. Determination of the commencement of business activities.
3. Applicability of Rule 9A of the Income Tax Rules, 1962.

Issue-Wise Detailed Analysis:

1. Allowability of Consultancy Fees as a Business Expenditure:
The Revenue challenged the deletion of the addition of Rs. 50 lacs made by the Assessing Officer (A.O.) on account of disallowance of consultancy fees paid to M/s Idream Productions Pvt. Ltd. The A.O. argued that the consultancy fees were not incurred in connection with the existing business of the assessee, which was primarily trading and investment in shares and debentures. The A.O. contended that the fees were related to a new, unconnected business of film production and thus not allowable under Section 37 of the Income Tax Act. The assessee countered that the fees were for identifying and introducing parties for its production ventures, an activity integral to its expanded business. The CIT(A) found merit in the assessee's argument, noting the unity of control and management between the trading and film production activities. The CIT(A) held that the consultancy fees were incurred after the business was set up and were thus allowable as business expenditure.

2. Determination of the Commencement of Business Activities:
The A.O. also contended that the consultancy fees were pre-commencement expenses as the film production contracts were a new business activity for the assessee. The assessee argued that the business commenced with the signing of the contracts with M/s Sahara India TV Network and the receipt of an advance. The CIT(A) agreed with the assessee, citing that the business was set up when the contracts were signed and the advance was received. The CIT(A) referenced judicial precedents, including the Bombay High Court's decision in CIT vs. Ralliwolf Ltd., which held that a business is considered set up when it is established and ready to commence operations. The Tribunal upheld this view, agreeing that the business was set up during the year under consideration, making the consultancy fees deductible.

3. Applicability of Rule 9A of the Income Tax Rules, 1962:
The A.O. applied Rule 9A, which deals with deductions in respect of expenditure on the production of feature films, arguing that the consultancy fees should be allowed only in the year of the film's release. The assessee contended that Rule 9A was not applicable as it was acting as an agent for M/s Sahara India TV Network, the actual producer. The CIT(A) examined the agreement between the assessee and M/s Sahara India TV Network, noting that M/s Sahara India TV Network was referred to as the "producer" while the assessee was the "production house." The agreement stipulated that the producer owned all rights and controlled the production process, indicating that the assessee was not the film producer as per Rule 9A. The Tribunal concurred, finding that M/s Sahara India TV Network was the producer and Rule 9A was not applicable to the assessee's business. Consequently, the consultancy fees were allowable in the year they were incurred.

Conclusion:
The Tribunal upheld the CIT(A)'s order, allowing the deduction of Rs. 50 lacs paid as consultancy fees to M/s Idream Productions Pvt. Ltd. The Tribunal dismissed the Revenue's appeal, confirming that the expenses were incurred in connection with the business set up during the year under consideration and that Rule 9A was not applicable. The order was pronounced in the open court on 5th July 2013.